“We want to be held to account …” said Ruth Kelly, the new public face of the English water companies, last week, briefly raising hopes of a moment of reckoning for the industry’s past (and current) sewage spills. Then the chair of Water UK clarified what her version of accountability covers. The companies wish to be held to account “… for putting it right”.
The past 30 years, we were invited to think, should be considered an unfortunate chapter in which the industry, terribly unfortunately, didn’t give sewage spills enough attention while other investments were prioritised. That was the gist of her apology. “By and large, the water companies were carrying out their legal responsibilities but … what’s legal is not necessarily the right answer or what people expect,” she argued on BBC Radio 4’s Today programme.
One trusts this “by and large” claim provoked spluttering among officials at the Environment Agency and Ofwat. As Kelly must know, both regulatory bodies have been engaged for the past 18 months in an inquiry to determine whether the industry was, in essence, not treating as much sewage as it should have been at 2,000-plus treatment plants. Whether legal duties were met is very much a live question.
Ofwat and the EA are understandably tight-lipped on details until any enforcement action is decided – the EA has powers of criminal prosecution and Ofwat can impose penalties worth 10% of turnover.
But here’s what David Black, Ofwat’s chief executive, said last June when South West Water was added to the list of companies under specific investigation. “From what we have seen so far, the scale of the issue here is shocking.” The rest of list comprises Anglian Water, Northumbrian Water, Thames Water, Wessex Water and Yorkshire Water – so six of the nine big firms in total.
Should Thames, the biggest company, be found guilty, that could mean a fine of £218m based on last year’s £2.2bn turnover.
One got another flavour at what’s at stake when Jonson Cox, who retired as chair of Ofwat last summer, gave evidence to a House of Lords committee in September. Concern around the operation of wastewater treatment works dated back to 2015, he said, but came to a head in October 2021 when data from a rollout of new monitors started to arrive. “We were absolutely dismayed by that information,” he told the Lords.
More explosively, he suggested companies probably knew about non-compliance with permits before 2021. “Did companies not know anything about this? I do not find that credible,” said Cox. “I find it interesting that as the rollout reached a critical scale the data was put on the table.”
This investigation goes to the heart of financial incentives in the water industry: whether it’s just been easier (and lucrative) to allow sewage to spill into rivers than to do the difficult and expensive job of treating it.
In follow-up written testimony, Cox hinted that the industry – now attuned to the public mood, according to Kelly – has reacted to the biggest post-privatisation investigation by reaching for its lawyers. “Rather than spend months and years contesting the enforcement action the regulators have under way, companies with widespread and systemic breaches need to show that they understand how and why they went wrong and get into compliance fast, and no later than by 2025,” he advised.
As they contemplate Kelly’s less-than-generous offer to have £10bn added to their bills, customers might digest three of Cox’s other points.
First, the former regulator said the problem with storm overflows was “not just ‘investment’, as is so often cited by companies”. Nearly a third of breaches resulted from inadequate maintenance of sewers, he said – maintenance that the companies must certify to Ofwat every year that they can sustain to legal standards. “If they don’t believe they have the resources to do their job, they should have appealed,” he said.
Second, on the question of who should pay for improvement, he offered a simple formula: where companies have breached legal requirements or failed to ensure an effective sewerage and wastewater treatment system, “it is for companies and their shareholders to fund and put the problem right”. The elements that get factored into bills are where new standards are required.
Third, an important technical point: since the value of companies’ assets is indexed to inflation, a form of windfall gain is now being enjoyed. “It would seem not unreasonable,” Cox said, to expect companies to share this gain and absorb some financial pain themselves.
That is the context in which to view Kelly’s pitch for £10bn-worth of customer-funded investment. There is no reason for Ofwat to accept it on behalf of customers until investments that should have happened in the past have been 100% recovered from corporate pockets. A couple of the more far-sighted chief executives in the sector, it should be said, accept as much; they predict fresh equity injections by shareholders at some firms to get the £10bn plan rolling.
Yet the official Kelly and Water UK narrative contained no hint of financial compromise or even mention of the major on-going regulatory inquiry. Instead, it read as an attempt to draw a line under the past and move on. That won’t wash. Accountability must also be backward-looking.
